Case #3 -- Analysis of Options & Futures Prices: due May 6, 1996
1. The listings below from the April 16, 1996 Wall Street Journal
(based on closing prices for April 15) show put and call option
quotations for five stocks (Kodak, IBM, Microsoft, Netscape, and
Xerox), and the S&P 500 portfolio. Use these data to answer
the following questions:
Option Prices
Treasury bill yields
(a) Are there any obvious profit opportunities (violations of
boundary conditions) available in buying or selling Kodak, IBM,
Microsoft, Netscape, or Xerox call options? If so, explain what
you would have to do to "make money." If not, explain
why you concluded that there were no arbitrage opportunities.
- Use the Excel spreadsheet discussed in class, OPTIONS.XLS in ZIP format
(also available on the FIN411 directory of the Simon School fileserver)
to analyze the call and put option prices for three of the individual
stocks (your choice) and the S&P 500 portfolio.
- How do the market prices for the call options compare with
the Black-Scholes model prices? Can you explain any differences
that you see?
Hint: an Excel spreadsheet containing prices & dividends for Kodak, IBM,
Microsoft, Netscape, Xerox and the S&P 500 may be useful to you, F411C3.XLS in ZIP format
(also available on the FIN411 directory of the Simon School fileserver).
- Estimate the implied variance of these four securities. Explain
how you calculated this variance. Is the variance rate the same
for a given security for different time horizons? (e.g., May and
July? or July and October?) Why or why not? Is the variance
rate implied by the "long-term options" (e.g., January
1997 for Kodak or January 1997 or 1998 for IBM, etc.) the same
as for the shorter term options? Why or why not?
- The next ex-dividend dates for Kodak are May 27, August 26,
and October 28 (with dividend payments of $0.40). The next ex-dividend
dates for IBM are May 6, August 12, and November 11 (with dividend
payments of $0.25). The next ex-dividend dates for Xerox May
27, August 26, and October 28 (with dividend payments of $0.87).
The current dividend yield on the S&P portfolio is about
2.80% per annum. How, if at all, will this affect your analysis
of the value of the call option contracts you studied in parts
(a) and (b)? Explain.
3. The listings below from the April 16, 1996 Wall Street Journal
(based on closing prices for April 15) show quotations for the
futures contracts on 91-day Treasury bills and on the S&P
500 index. Explain how you might use the data on Treasury bill
yields and futures prices for Treasury bills and for the S&P
500 portfolio to "make money."
Futures Prices
- Based on these data, are there any apparent profit opportunities
in trading Treasury bill futures? If so, what position would
you take? If not, why not?
- Based on these data, are there any apparent profit opportunities
in trading S&P futures? If so, what position would you take?
If not, why not?
You may find it useful to take advantage of the spreadsheet FUTURES.XLS in ZIP format
that was discussed in class (which is also available on FIN411
directory of the Simon School fileserver). You should do this
assignment in groups and prepare a concise report that explains
your analysis and findings. Neat, coherent presentation of high-quality
analysis is the goal of this assignment. Do not include lots
of computer output (although you may copy small portions of output
that include relevant statistics).
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